Is This Zynga's J.C. Penney Moment?

Is This Zynga's J.C. Penney Moment?

Early last month, I was tough on Zynga after the company issued a press release outlining how it would close various office locations and lay off 520 employees, or around 18% of its workforce. At the same time, Zynga also issued worse-than-expected second-quarter guidance, forecasting a loss between $36.5 million and $26.5 million on terrible bookings of $180 million to $190 million.

To be sure, Zynga's stock had just plunged 11% over the previous two trading days on the news, prompting some investors to wonder whether it was a good time to pick up shares on the cheap.

Even so, I remained convinced the drop was merited, especially considering Zynga's bookings last quarter also fell 30% year-over-year to only $229.8 million, while revenue fell 18% over the same period to $261.3 million.

Sure enough, shares of Zynga fell by another 10% over the next few weeks as analysts continued to downgrade the stock, before rebounding slightly with the broader market last week.

Out with the old... sort of
Then, on Monday afternoon, shares of Zynga popped 10% after it announced its much-maligned CEO, Marc Pincus, would step down as Zynga gave the top job to Don Mattrick, who for the previous six years had worked at Microsoft, which included three years as president of its interactive entertainment business. There, Mattrick helped grow the Xbox 360's global installed base by sevenfold to more than 75 million consoles.

Before that, Mattrick had served as the president of Worldwide Studios at Electronic Arts, where he had worked since 1991 when EA acquired the software company he founded at the age of 17.

Meanwhile, Pincus -- who our very own Motley Fool community happened to name the "Worst CEO of the Year" in 2012 -- will remain chairman of Zynga's board, at the same time serving as the company's chief product officer.

Who better than Don Mattrick, then, to turn around Zynga's struggling business, right? Naturally, the ensuing optimism has pushed shares of Zynga up a whopping 23% from Monday's open to Wednesday's close.

Ron Johnson all over again?
Unfortunately, I have to agree with fellow Fool Alex Dumortier, who asserted Monday that Zynga's pop is nothing more than a triumph of hope over reason considering the stock still looks too expensive to make such a long-term bet with respect to the yet-to-be-determined size of its addressable market.

In fact, this week's news seems eerily similar to June 14, 2011, when J.C. Penney announced it would replace then-CEO MIke Ullman with Ron Johnson. Like Zynga's news this week, J.C. Penney's announcement sparked a 17.5% rally in shares of the beleaguered retailer that day.

And like Mattrick, Johnson came with an enviable pedigree after he left Apple as the accomplished head of its retail store operations. Before that, Johnson worked as vice president of merchandising at Target, helping to boost consumers' perceptions of the stores as a more stylish place to shop by launching exclusive household items designed by architect Michael Graves.

Of course, we all know Johnson ended up finally getting ousted from his post after his ambitious turnaround plan proved too much for struggling J.C. Penney to endure. Shortly afterward, the company ended up bringing back Ullman as CEO with the hopes of salvaging what was still left.

The thing is, while Johnson's plan was a radical one, I actually thought it had at least a small chance of succeeding over the long run, especially when we remember he was trying to effectively change the unfavorable economics of J.C. Penney's business by focusing less on the coupon-clipping crowd and more on higher-spending, everyday value type consumers.

Foolish takeaway
But at the end of the day, superinvestor and CEO Warren Buffett had it right all along when he famously said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Unfortunately for Don Mattrick, it's definitely safe to say Zynga has a reputationforbadeconomics. And even if Zynga does manage to properly execute on its online gambling ambitions, I'm still convinced Mattrick will have one heck of a time morphing the company into anything close to being worthy of our hard-earned investing dollars.

For now, anyway, I just can't buy into this false hope.

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